How are Creditors Paid?

The plan payments you send to the Trustee are used to pay your creditors, as well as your attorney and the Trustee.

So that you will have some idea how your creditors are paid, you should know that there are three (3) basic types of claims: priority, secured, and unsecured. First, the Trustee pays creditors with claims on your property (secured claims) and creditors holding claims due to such debts as child support and delinquent taxes (priority). Finally, the Trustee pays everyone else (general unsecured claims).

In San Fernando/ Northern division, your attorney may receive up to 100% of the plan payment amount towards payment of his or her fees.

Priority and secured creditors are paid pro-rata each month from funds that are available for distribution, unless the plan provides otherwise.

Unless the order of confirmation provides other treatment for these creditors, unsecured creditors are not paid until the secured creditors and the priority creditors are paid in full. Consequently, it could be some time before the first payments are made on the unsecured claims. Secured claims usually receive interest at the rate proposed in debtor's plan, unless the Court orders otherwise.

If a creditor does not agree to the interest rate proposed in the debtor's plan, the creditor must object prior to confirmation.

BASE PLAN. If your plan pays less than 100% to your unsecured creditors, you have a base plan. This means that you must pay your plan payments to the Trustee for distribution to creditors for the entire term of your plan, or until your unsecured creditors are paid at 100%. The grand total you must pay to the Trustee is called the base amount. For example, if your plan payment amount is $100 per month, and you have 48 month base, you must pay to the Trustee at least $4,800. The sum of $4,800 is your base amount.

Under a base plan, you must submit sufficient funds to pay: (1) the percentage you proposed to pay to your unsecured creditors, or (2) the base amount, whichever is greater. If you have a plan that pays less than 100% to your unsecured creditors, the order of confirmation or your plan provides that state and federal tax refunds are pledged to the plan. Refunds are not a substitute for plan payments, and you must continue to pay your regular monthly plan payment, in addition to tax refunds. Tax refunds are not credited against your base amount.

Remember that you have committed all of your projected disposable income to the Trustee for at least the first 36 months of the plan. If you pay the base amount prior to the expiration of your plan, you may be required to continue to make monthly payments in order to pay a higher percentage to your unsecured creditors. Before making any advance or lump sum payment, talk to your attorney.

INSURANCE. You are required to maintain insurance on all property that serves as security for your debt to any creditor. This includes vehicles, real property, and any business assets if you are a debtor engaged in business. If you do not maintain insurance, the judge may permit the creditor to repossess or foreclose on the property that is the security for the debt.

POST-PETITION TAXES, TAX RETURNS AND TAX REFUNDS. You are required to file your individual tax returns each year as they come due, and to pay any taxes that you owe. Debtors engaged in business must also timely file all appropriate state and federal returns as required by law. If you fail to file your tax returns or to pay your taxes, the Court can dismiss your case, and you may incur substantial penalties. Be sure to mail a copy of your tax returns to the Trustee each year within ten days after you have filed those returns.

If your plan pays less than 100% to your unsecured creditors, you are required to pledge any tax refunds to the Trustee.

THE PERCENTAGE YOU PAY TO UNSECURED CREDITORS. If your Chapter 13 plan does not pay at least a seventy percent (70%) dividend to unsecured creditors, you may not be able to obtain a discharge under a Chapter 7 liquidation bankruptcy for six years following completion of your Chapter 13 plan. Although you may feel that this is not important, giving up the right to full bankruptcy relief is significant and could work to your disadvantage if, in the future, you are faced with a catastrophic financial problem. If your financial situation improves while you are in your plan, you can increase the dividend to your creditors and thus improve the effect of your discharge. If you want to do this, meet with your attorney to review whether a better discharge is possible.